While we consider the contents of this publication to be of general merit, its sponsorship by the U.S. Small Business Administration does not necessarily constitute an endorsement of the views and opinions of the authors or the products and services of the companies with which they are affiliated.
All of SBA's programs are extended to the public on a nondiscriminatory basis.
TABLE OF CONTENTS
What is the Business?
Who is the Franchiser?
What is the Franchise Package?
The Disclosure Document
APPENDIX: INFORMATION RESOURCES
The success rate for franchise-owned businesses is very high. According to studies conducted by the U.S. Department of Commerce from 1971 to 1987, less than 5 percent of franchised businesses failed or were discontinued in each of those years. However, success is not guaranteed. One of the biggest mistakes that you can make is to be in a hurry to get into business. If you take shortcuts on your evaluation of a potential business, you might neglect to consider other franchises that are more suitable for you. Don't be pressured into a franchise that is not right for you. Although most franchise operations are managed by reputable individuals, as in all industries, some are not. Also, some franchised businesses are poorly managed and financially weak. Resist pressure to purchase before you complete a thorough investigation.
This publication is designed to assist you in investigating your options. It includes the questions you should ask to adequately evaluate the business, the franchiser, the franchise package and yourself as a franchise owner.
A franchise is a legal and commercial relationship between the owner of a trademark, service mark, trade name or advertising symbol and an individual or group seeking the right to use that identification in a business. The franchise agreement governs the method for conducting business between the two parties. Although forms of franchising have been in use since the Civil War, enormous growth has occurred more recently. By the end of 1990, more than 500,000 franchised establishments in 60 industries achieved gross sales of over $700 billion dollars and employed 7 million full- and part-time workers. Industries that rely on franchised businesses to distribute their products and services touch every aspect of life, from automobile sales and real estate to fast foods and tax preparation.
In its simplest form, a franchiser owns the right to a name or trademark and sells that right to a franchisee. This is known as product/trade name franchising. In the more complex form, known as business format franchising, a broader and ongoing relationship exists between the two parties. Business format franchises often provide a full range of services, including
There are a number of aspects to the franchising method that appeal to prospective business owners. For example, easy access to an established product and a proven method of operating a business reduces the many risks of opening a business. In fact, U.S. Small Business Administration and U.S. Department of Commerce statistics show a significantly lower failure rate for franchised businesses than for other business start-ups. The franchisee purchases not only a trademark, but also the experience and expertise of the franchiser's organization. However, a franchise does not ensure easy success. If you are not prepared for the total commitment of time, energy and financial resources that any business requires, you should stop and reconsider your decision to enter the franchise business.
As in all major business decisions, nothing substitutes for thorough investigation, planning and analysis of your options. This publication is designed to help you systematically review the possibilities and pitfalls of the franchised business you are considering. Use the questions below to guide your research and cover all the bases. Read the entire publication before you begin to gather information.
What Is the Business?
Determine whether the business opportunity would be a successful venture on its own, apart from the benefits offered by the franchiser.
Who Is the Franchiser?
Visit at least one of the firm's franchises. Ask for a list of all of the firm's current franchises and make sure that you select the one to visit. Avoid calling those names recommended by the franchiser. At the very least, the franchiser must provide you with the names of 10 franchises in your prospective market area.
When you meet with the franchisees, observe their operation, discuss expenses and ask how well the franchiser supports the franchise units. Does the franchiser actively promote and market the products or services of the franchise? You should determine the reputation, stability and financial strength of the franchiser.
What Is the Franchise Package?
Bring all your information and resources together as you examine the contract. Think carefully about the level of independence you will maintain as a franchisee. How comprehensive are the operating controls? Be very clear about the full costs of purchasing the franchise. Involve your attorney, accountant and/or business advisor as you examine these questions.
The Disclosure Document
The Federal Trade Commission (FTC) requires sellers of franchises and other business opportunity ventures to provide prospective investors with the information they need to make an informed investment decision. It also requires that all earnings claims be documented, that the information investors receive be complete and accurate and that investors have adequate time to consider and evaluate the disclosures before making any final purchase commitment. All required information is given to prospective investors in the form of a franchise disclosure document, which must be furnished at least 10 business days before any purchase may occur. This document includes 20 important items of information, such as
Again, use your professional support to examine all of these issues. Some of the contract terms may be negotiable. Find out before you sign; otherwise, it will be too late.
Perhaps your most important step in evaluating a franchise opportunity is examining your own skills, abilities and experience. The ideal franchisee is a creative, outgoing person who is eager to succeed, but not so independent that he or she resents other people's advice. You must be able to balance your entrepreneurial initiative with a willingness to comply with the business formulas used by the franchiser. Remember, a successful partnership between a franchisee and franchiser involves a mutual understanding of each other's values and achievements.
Determine exactly what you want out of life and what you are willing to sacrifice to achieve your goals. Be honest, rigorous and specific. Ask yourself: Am I qualified for this field
Ask yourself how this decision will affect your family. Do they understand the risks and sacrifices required, and will they support your efforts? Beginning a franchise business is a major decision that does not ensure easy success. However, an informed commitment of time, energy and money by you and your family can lead to an exciting and profitable venture.
You should consult a franchise attorney, an accountant and/or a business advisor to counsel you and go over the disclosure document and proposed contract. Their advice will help you make a realistic and sound decision. Remember, the money and time you spend may save you from a major loss on a bad investment. Also, see the information resources in the appendix.
APPENDIX: INFORMATION RESOURCES
U.S. Small Business Administration (SBA)
The SBA offers an extensive selection of information on most business management topics, from how to start a business to exporting your products.
This information is listed in The Small Business Directory. For a free copy contact your nearest SBA office.
SBA has offices throughout the country. Consult the U.S. Government section in your telephone directory for the office nearest you. SBA offers a number of programs and services, including training and educational programs, counseling services, financial programs and contract assistance. Ask about
For more information about SBA business development programs and services call the SBA Small Business Answer Desk at 1-800-U-ASK-SBA (827-5722).
Other U.S. Government Resources
Many publications on business management and other related topics are available from the Government Printing Office (GPO). GPO bookstores are located in 24 major cities and are listed in the Yellow Pages under the bookstore heading. You can request a Subject Bibliography by writing to Government Printing Office, Superintendent of Documents, Washington, DC 20402-9328.
Many federal agencies offer publications of interest to small businesses. There is a nominal fee for some, but most are free. Below is a selected list of government agencies that provide publications and other services targeted to small businesses. To get their publications, contact the regional offices listed in the telephone directory or write to the addresses below:
Consumer Information Center (CIA)
P.O. Box 100
Pueblo, CO 81002
The CIA offers a consumer information catalog of federal publications.
Consumer Product Safety Commission (CPSC)
Publications Request
Washington, DC 20207
The CPSC offers guidelines for product safety requirements.
U.S. Department of Agriculture (USDA)
12th Street and Independence Avenue, SW
Washington, DC 20250
The USDA offers publications on selling to the USDA. Publications and programs on entrepreneurship are also available through county extension offices nationwide.
U.S. Department of Commerce (DOC)
Office of Business Liaison
14th Street and Constitution Avenue, NW
Room 5898C
Washington, DC 20230
DOC's Business Assistance Center provides listings of business opportunities available in the federal government. This service also will refer businesses to different programs and services in the DOC and other federal agencies.
U.S. Department of Health and Human Services (HHS)
Public Health Service
Alcohol, Drug Abuse and Mental Health Administration
5600 Fishers Lane
Rockville, MD 20857
Drug Free Workplace Helpline: 1-800-843-4971.
Provides information on Employee Assistance Programs.
National Institute for Drug Abuse Hotline: 1-800-662-4357. Provides information on preventing substance abuse in the workplace.
The National Clearinghouse for Alcohol and Drug Information: 1-800-729-6686 toll-free. Provides pamphlets and resource materials on substance abuse.
U.S. Department of Labor (DOL)
Employment Standards Administration
200 Constitution Avenue, NW
Washington, DC 20210
The DOL offers publications on compliance with labor laws.
U.S. Department of Treasury
Internal Revenue Service (IRS)
P.O. Box 25866
Richmond, VA 23260
1-800-424-3676
The IRS offers information on tax requirements for small businesses.
U.S. Environmental Protection Agency (EPA)
Small Business Ombudsman
401 M Street, SW (A-149C)
Washington, DC 20460
1-800-368-5888 except DC and VA
703-557-1938 in DC and VA
The EPA offers more than 100 publications designed to help small businesses understand how they can comply with EPA regulations.
U.S. Food and Drug Administration (FDA)
FDA Center for Food Safety and Applied Nutrition
200 Charles Street, SW
Washington, DC 20402
The FDA offers information on packaging and labeling requirements for food and food-related products.
For More Information
A librarian can help you locate the specific information you need in reference books. Most libraries have a variety of directories, indexes and encyclopedias that cover many business topics. They also have other resources, such as
In addition to books and magazines, many libraries offer free workshops, lend skill-building tapes and have catalogues and brochures describing continuing education opportunities.